Q+A: What Copenhagen Accord means for prices, markets

By IBT Staff Reporter On 12/21/09 AT 2:20 PM

LONDON - European carbon prices crashed by almost 9 percent on Monday after UN climate talks ended on Saturday with a bare-minimum agreement between after the U.S., China and a few other emerging powers that falls far short of the conference's original goals.

The European Union said the accord -- weaker than a legally binding treaty and weaker even than the 'political' deal many had foreseen -- was not ambitious enough to persuade it to raise its carbon cutting target to a 30 percent cut by 2020 versus 1990 levels from a 20 percent cut.

The Copenhagen Accord also cast more uncertainty on the post-2012 future of a carbon offset trading scheme under the Kyoto Protocol called the Clean Development Mechanism (CDM).

Market players weighed in on how this will affect prices for EU Allowances, the permits traded under the EU's $92 billion Emissions Trading Scheme (EU ETS), for Certified Emissions Reductions (CERs), the offsets traded under the CDM, and how it will affect the development of global carbon markets in general.

WHAT DOES THIS MEAN FOR CARBON PRICES?

* Mark C. Lewis, analyst at Deutsche Bank

There is now no near-term prospect of the EU raising its 2020 target. As a result, sentiment will be negatively affected and we expect EUA prices to decline over the next few sessions.

With the selling of surplus EUAs by industrials in early 2010 already a real possibility before the outcome of Copenhagen was known, we would not now be surprised to see sustained EUA price weakness through to the middle or end of February 2010.

* Emmanuel Fages, analyst at Societe Generale

The mood will be bearish. I do not think many speculators had long positions left - they started being disposed of on Thursday. What we could see is not mainly length sales, but short creation. Prices cannot go down very far. Sentiment is not enough to move prices much as fundamentals will continue driving the scheme for the operators.

* Meg Brown, analyst at Citigroup

The unsatisfactory outcome of the negotiations now makes it unlikely that the EU's 20 percent target will be changed, in our view, with the most likely reconsideration of the target not until 2015 -- in line with the new accord's timeline.

This is be negative for EUA prices in the short term, through 2010 and potentially through to 2020. We assume an average Phase 2 (2008-12) EUA price of 20 euros per tonne, rising to 25 euros in 2013 and 30 euros in 2020, based on an expectation of some tightening of the scheme from 2013. Our floor price for periods of low permit demand is 10 euros.

* Trevor Sikorski, director at Barclays Capital

The impact is likely to be transitory. After this morning's strongly bearish opening, the market is more likely to return to reasonably normal trading patterns. The Copenhagen failure did little to alter the expected supply-demand balance under the EU ETS and it is not likely to have changed the underlying hedging pattern of power sector participants. The impact on the industrial sales is harder to call, as it does mean that some of the potential upside for EU carbon prices has been eroded.

Q1 is still likely to see a low for carbon prices as, if anything, there is slightly more incentive for industrial length to hit the market. We expect prices are likely to average 11.50 euros in Q1 before strengthening over the remainder of 2010.

WHAT DOES THIS MEAN FOR CARBON MARKETS IN GENERAL?

* David Metcalfe, director at Verdantix

A non-binding agreement that codifies national commitments and includes voluntary emission reductions of countries like China significantly increases the probability that the Kerry-Boxer (U.S. cap and trade) legislation will be passed.

Executives responsible for energy and climate change plans should avoid new investments in the Kyoto-based global carbon markets. Badly defined rules, insufficient UN staff and a depressed carbon price conspire to make this a very high risk market. The accord further postpones crucial reform of this dysfunctional market mechanism.

* Mark C. Lewis, Deutsche Bank

It heightens uncertainty over the continuation of the CDM and JI mechanisms beyond 2012, at least in their current forms ... The development of new CDM projects is likely to slow over the course of next year, and perhaps significantly so.

This opens up the possibility of ... bilateral deals between the EU and third countries under which emissions reduction projects could be established in to generate credits for use in the EU ETS over 2013-20 (note: any such credits would complement, not replace, Kyoto offsets.

* Meg Brown, Citigroup

International offset markets were hoping for detail on how CDM would be expanded, perhaps including sector-specific benchmarks and an expansion of the market's size. Heavy industry must wait longer for clarification of emission liabilities and international abatement mechanisms ... This will likely perpetuate carbon market uncertainty post 2012.

* Alessandro Vitelli, director at IDEAcarbon

Copenhagen is a bottom-up, federal process where sovereign nations contribute their national commitments to the process. Kyoto expressed a similar approach in a top-down fashion, which earned it the enduring enmity of the U.S.

For the markets, Copenhagen holds the continued promise of interlinked markets in both developed and developing countries.

* Trevor Sikorski, Barclays Capital

This is a very disappointing outcome that is even below our modest expectations. The news is bearish ... I see nothing here that should drive investment in the carbon commodity and low carbon technology.

* James Cameron, vice-chairman at Climate Change Capital There are small encouragements in the reform of the CDM which should make the process better - quicker, fairer and more effective at taking tonnes of carbon out of the atmosphere.

* Richard Gledhill, head carbon market services, PwC

President Obama gave a clear message in his speech in Copenhagen - America is going to take action on climate now. If passed by Congress, U.S. climate legislation could create a market three times the size of the EU scheme. That would be a massive boost to the global carbon market, but would also move its focus from London to New York.